Layaway vs. credit: How should you pay for gifts?

Short on cash this holiday season? If so, the option to pay for your presents over time might sound appealing — and you've got two options for that: credit and good, old-fashioned layaway.

Yet before pulling out the plastic or heading to layaway counter, you'll want to weigh the pros and cons of each option. Here's how the two purchasing methods stack up against each other — and a run-down of the layaway options for the 2013 holiday shopping season (see chart below).

When to use layaway

Although it allows you to pay for an item over time, just like a credit card does, buying presents with layaway can be better than using plastic because it forces you to make a budget, says Edgar Dworsky, founder of ConsumerWorld.org, a consumer resource website.

“Layaway can be good for folks who don't have the money now and don't want to get hit with credit card bills – and finance charges – in January,” he says.

In addition:

You'll probably pay less overall. If you end up carrying a balance on your card, layaway will likely be cheaper than using a credit card and paying it off over several months – or longer, says Richard Feinberg, professor of consumer sciences and retailing at Purdue University. There are fees for layaway, but they're usually not as expensive as up to 20 percent — or higher — interest over months or years, he says. If you have a low-interest credit card, though, and plan to pay off a relatively small balance in just a few months, a credit card could be the more affordable option. Run the numbers to make sure.

It helps you budget and save. When you put holiday presents on layaway, you have to come up with the cash for a down payment, then create a plan to make payments on time, Dworsky says. If you fail to do so, the gift will not end up under the tree. “Layaway forces you to be a little more disciplined,” he says. “When you put something on a credit card, it's almost a mindless thing.”

You won't get sucked into debt. The worst-case scenario with layaway: You miscalculate, run short on funds and end up having a cancellation fee deducted from the money you've already paid, Feinberg says. On the other hand, putting your presents on a credit card could get you caught up in a snowballing cycle of debt — and credit damage — that lasts for years, he says, if you don't have a payoff plan.

When to use credit cards

Credit cards are the best holiday buying tool for consumers who pay their balances in full each month and use rewards cards to earn miles or points, Feinberg says.

In addition to the rewards, there are other advantages to credit, including:

Perks that add protection. Credit cards offer consumer protections that other methods of payment don't have, including the ability to dispute a charge. Many cards also come with added benefits that can help when you're making a list and checking it twice. For example, some cards extend the warranties on items purchased with the card, says Luke Landes, founder of the consumer website Consumerism Commentary. And some offer price guarantees: “If you find the same item for less at another store, you might actually be able to get a refund,” he says.

Less hassle upfront. With a credit card, you swipe and you're done. But with layaway, you'll have to jump through several hoops, Dworsky says. For example, you'll have to make repeated trips to the store, keep track of payment due dates and make sure you have cash on hand at the right times.

You can buy whatever you want. “Not everything qualifies for layaway,” Dworsky says, noting that stores often offer that option only for certain items or categories of goods.

Questions to ask about layaway

If you do decide to go with layaway to help make the season bright, experts say it's important to know the rules before you sign on the dotted line.

Use this chart to compare this season's layaway programs from major retailers. Then, ask the seven questions below.

After you compare your options, ask these questions about the option you pick:

Is there a fee for signing up? Most retailers charge a one-time sign-up fee for layaway, Feinberg says. Walmart nixed its opening fee for 2013, while other programs have starting fees ranging from $5 to $10.

What happens if the item goes on sale after I put it on layaway? Rules vary, but many stores won't slash the price of an item that's already on layaway, Landes says. “Basically you're locking in the price when you initiate the layaway,” he says.

When are payments due, and how much? A layaway contract will specify when payments are due and how much you have to pay each time, Dworsky says. For example, Kmart requires payments of 25 percent of the original balance due every two weeks for its 8-week layaway option.

How can I make payments? The contract also will tell you how you can make payments: in-store or online, as well as which forms of payment you can use. For example, Kmart allows you to use certain methods of payment in the store, including cash, check and debit cards. Online, you can use credit cards or Kmart gift cards.

What happens if I'm late on a payment? The layaway agreement should spell out the consequences of a late or missed payment, Dworsky says. In some cases, the layaway might be canceled, or there might be a grace period, he says.

What is the cancellation fee? If you change your mind or run short of funds, you can typically cancel your layaway and get much of your money back, minus a cancellation fee. Most cancellation fees range from $5 to $10, Dworsky says. But some stores might charge a percentage of the total. In that case, “it could get expensive pretty fast,” he says.

Do you guarantee that I'll get my merchandise? In some cases, though it's not common, you might make your last payment and then find that the store sold out of the item you put on layaway, Feinberg says. But, depending on where you live, state law might not allow that. In Massachusetts, for example, Dworsky says, “the seller is required to put away the very item you selected or its identical twin.”

With layaway, it's always important to read the agreement carefully to make sure you understand the ins and outs, which can get complicated, experts say.

“It's the fine print that has the details that can cause problems,” Feinberg says. “There are all sorts of traps that don't exist for other kinds of purchases.”

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